Fed Rate Hike Odds Hang in the Balance Ahead of July CPI Report

The upcoming July CPI report has investors on edge as it could decide whether markets get relief or another headache. The timing of this report is awkward, given that the US economy shed 23,000 jobs in July and pessimism remains elevated. The market's expectations are almost perfectly divided, with a 52.1% chance of the Fed holding rates in September versus a 47.9% chance of a hike.

Wall Street's base case is not particularly alarming, with a survey of 15 banks expecting July headline inflation to rise by 0.12% to 3.4%. Core CPI excluding food and energy is expected at 0.22%, according to HSBC, which also expects another soft print after June's headline price fell 0.42%. If this view holds, the bank predicts Treasury yields will decline, and rate hike bets will fade, potentially giving risk assets a friendlier backdrop.

However, if July CPI shows a hotter-than-expected reading, it could strengthen the case for another Fed hike and put renewed pressure on stocks, bonds, and crypto. For Bitcoin, the immediate question is whether inflation provides the catalyst for relief or another reason to sell. With oil still reacting to developments around the Strait of Hormuz and September rate expectations virtually split, Wednesday's July CPI report could leave markets with very little room for error.